Regulate OTC Derivatives by Deregulating Them

Stout, Lynn A.; Helwege, Jean; Wallison, Peter J.; Pirrong, Craig

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Regulate OTC Derivatives by Deregulating Them

Regulation, Vol. 32, No. 3, pp. 30-41, Fall 2009

UCLA School of Law, Law-Econ Research Paper No. 09-22

12 Pages Posted: 12 Oct 2009 Last revised: 1 Nov 2009

See all articles by Lynn A. Stout

Lynn A. Stout

Cornell Law School - Jack G. Clarke Business Law Institute (deceased)

Craig Pirrong

University of Houston - Department of Finance

Date Written: Fall 2009

Abstract

As a result of the current financial crisis, there have been many calls for strict new regulation of over-the-counter financial derivatives. This paper proposes, instead, that we return to the now-voided common law on derivatives and consider them non-legally enforceable gambling contracts except when one of the parties can prove a bona fide hedging purpose. Doing this would not outlaw derivatives, but would instead require the rise of private institutions to enforce and control them, and would discourage their use for wild speculation. The paper includes appended comments from Jean Helwege (Penn State University), Peter Wallison (American Enterprise Institute), and Craig Pirrong (University of Houston), as well as a response from the author.

Keywords: OTC derivatives, derivatives, Irwin v. Williar, CDS, speculation, Commodities Futures Modernization Act

JEL Classification: G1, G13, K12, K22

Suggested Citation: Suggested Citation

Stout, Lynn A. and Helwege, Jean and Wallison, Peter J. and Pirrong, Craig, Regulate OTC Derivatives by Deregulating Them (Fall 2009). Regulation, Vol. 32, No. 3, pp. 30-41, Fall 2009, UCLA School of Law, Law-Econ Research Paper No. 09-22, Available at SSRN: https://ssrn.com/abstract=1485518